EUROPE: European Q4 earnings are just starting, and worth watching. They are among the world’s most depressed, and the most sensitive to any less-bad news. Europe’s earnings growth likely troughed last quarter and history shows it will lead any global recovery. Europe’s economy is already weak, its stock markets cyclical, and its stocks with low profit margins, high debt, and globalised. This has driven relative earnings growth to very depressed levels vs the US (see chart). But holds out hope for a strong rebound as regional PMIs start to stabilise and ECB rate cuts begin. Q4 earnings are off to a strong start, from Richemont (CFR.ZU) to ASML (ASML).
DIFFERENCES: European (IEUR) earnings growth is typically lower and more cyclical than the S&P 500. This reflects three main drivers. 1) Economic growth is lower. The region is flirting with recession whilst US GDP is still growing over 2%. Revenues are falling 4% in Europe vs low single digit growth in US. 2) Cyclical sectors are larger. Financials and Industrials are biggest sectors, at a third the index vs similar sized defensive growth tech leading in US. 3) Profitability is lower. Net profit margins are under 9%, much below the US. Whilst corporate debt is a quarter higher, at 100% of GDP. The average European stock gets half its sales from abroad.
CYCLICALS: Europe’s Stoxx 600 earnings growth expectations for Q4 are low, at -9%. And have plunged, from -5% just three weeks ago. Growth is focused on the consumer discretionary, healthcare, and real estate sectors. With the biggest earnings drags coming from commodities and renewables-heavy utilities. Interestingly, earnings growth is seen as better from the more depressed and global-focused stock markets like Sweden and Germany. With earnings growth declines focused on the Netherlands, France, and UK. Stoxx 600 valuations are over 10% below their long-term average 14.5x price/earnings ratio, and 35% lower than S&P 500 (SPY).
All data, figures & charts are valid as of 24/01/2024.